Should I Convert My 401(k) Into A Rollover IRA?

I recently decided to convert my 401(k) into a rollover IRA and I’d like to share with you why. Given I no longer have earned income as an early retiree, I can no longer contribute to my company 401(k). For those of you who are transitioning to a new job, rolling over your 401k is a good idea.

Even though my 401(k) had 40 or so mutual fund choices provided across various sectors, countries, and asset classes, it wasn’t enough for what I wanted to do. Many people who rollover their 401(k) feel the same way. With an IRA, you’ve got plenty more investment options.

THE BENEFITS OF ROLLING OVER TO AN IRA

1) More selection. I always want to be fully invested in my 401(k) because I’ve got other portions of my net worth in risk-free investments such as CDs. I treat my 401(k) like my own little hedge fund or mutual fund and so should you. You wouldn’t invest in a mutual fund that decides to go 80% cash because the reason why you are investing in a mutual fund is for equity or bond exposure. Equity mutual funds also have restrictions to how much cash they can hold e.g. usually 5% maximum.

My 401(k) is restricted to mutual funds only. I cannot buy specific stocks or ETFs nor can I short any securities as a hedge. To get short the markets I either have to go to cash or buy a bond fund, which admittedly turned out quite well (Read: The Proper Asset Allocation Of Stocks And Bonds By Age and see VUSUX). In essence, I wanted to move from being a macro fund to a hege fund who picked specific stocks with the flexibility to hedge. Names such as Apple, Baidu, and Sina are on my list.

2) Lower costs. The only costs you have when buying a stock is the transaction cost. I get 100 free trades for the first year of my rollover, so my transaction costs will likely be nothing for one year. ETF costs are usually 0.1% or less, which is why the ETF industry has grown tremendously at the expense of the actively managed mutual fund industry.

I ran my 401(k) through Personal Capital’s 401(k) Fee Analyzer and discovered my existing portfolio at the time would have cost me $1,700+ a year. That’s a ridiculous sum of money to be losing. I can easily construct my own portfolio of specific stocks and ETFs for $0 fees or probably less than $100 a year on a ~$400,000 portfolio. That’s a no brainer in my mind. If you haven’t run your 401(k) through the fee analyzer, I strongly suggest you do, especially since it costs nothing.

3) Less trading restrictions. My 401(k) and practically all 401(k)s have trading restrictions for the number of times you can rebalance a year. My old 401(k) restricted me to 13 rebalances a year until I would be locked out from rebalancing for a full three months after the limit was hit. Even if I wanted to move a minuscule 1% from one fund to another fund, that would count as a rebalance.

One probably shouldn’t conduct more than four major rebalances a year, but if you really like to optimize your portfolio by sticking to some specific percentage balances, 401(k) rebalancing restrictions are quite onerous. With my rollover IRA I can trade as much as I want provided I have the cash balance. Read: How Often Should I Rebalance My 401(k) A Year for more thoughts on the topic.

4) Less tax headaches. If you like to trade, you will have to reconcile your trades (report your cost basis) every single year to the IRS. About 10 years ago I completely forgot to report the cost basis for around $2 million in trades for some reason. The IRS therefore thought I made $2 million in trading profits and sent me a tax bill for over $500,000! In reality, I probably made only around $30,000 in profits as the $2 million was simply the total value of transactions. I sent in my individual costs by security and they exonerated me from the bill a couple months later.

With the rollover IRA, you can literally make a million trades and you won’t have to input a million reconciliations because the IRS only taxes you during the time of withdrawal on the total amount. This is something many people do not realize so feel free to ask questions in the comments section if you are unclear. The IRS doesn’t see all the buys and sells in your 401(k) either, but you are restricted from the amount of trades you can make. For those with a tendency to trade, a rollover IRA is much better than a 401(k).

5) Penalty free early withdrawals. There is an interesting rule called the 72(t) distribution which allows for early withdrawal before the age of 59.5. The catch is that once you elect to withdraw early you must continue to withdraw for five years or until you turn 59.5, whichever is longer. Your principal withdrawal is going to be taxed as ordinary income taxes so there is no free lunch.

The 72(t) distribution is great for folks who have retired early and have a sizable IRA they would like to tap. Let’s use me for example. I retired at 35 and have a rollover IRA that is worth roughly $400,000. I’m moving from the top income tax bracket of 39.6% to the 25% tax bracket thank goodness. What I can do is comfortably withdraw $10,000 a year in principal for 25 years until I’m 60 since some of the $400,000 is due to gains. Taking out $250,000 at a 25% tax bracket vs. a 39.6% tax bracket is roughly $37,000 less in taxes I’ve got to pay!

The 72(t) distribution is another reason why I’m against a ROTH IRA (pay taxes up front). You aren’t going to be making more money and paying a higher tax rate in retirement than when you are working.

THE NEGATIVES OF ROLLING OVER INTO AN IRA

1) May blow yourself up. With a wider selection of securities to choose from, you will be tempted to invest in things you wouldn’t normally be able to buy in your 401(k). I’m constantly going after higher risk, growth stocks like Tesla, Amazon, Apple, and Sina. Apple doesn’t seem to expensive, even at record highs, but who knows about the Chinese internet names? It’s easier to speculate more once you have more options. A 401k, and its limited options of funds may save you from yourself!

My 401(k) would probably only fluctuate +/- 15% for a 12 month period based on how I’ve constructed my portfolio. With growth stocks I could easily see +/- 30% swings to $280,000 to $520,000+.

2) Might be more stressful. When you’ve got all the power, all the glory and all the pain is on you. I used to check my 401(k) linked to my Personal Capital account along with other portfolios maybe once or twice a week to make sure everything is on track. Now I check my rollover IRA on a daily basis because I’ve got much higher risk with single stock investments. Speak to any hedge fund analyst or manager and they will tell you they are always on because of what’s going on in the Asian markets at night and the European market closing during our early mornings.

You can easily reduce your stress by having a more diversified rollover IRA portfolio that mimics exactly what you would have bought in a 401(k). But I’m a balls to the wall type of guy who bets big if I believe strongly in something. Having 25 positions at 4% each is very uninteresting. Give me five positions at 20% each or even three positions at 33% each and it’s game on! One of my biggest regrets at age 22 was not investing more in a stock that returned 50X in one year. At least I did invest several thousand dollars which I parlayed into my first rental property.

We can talk about portfolio theory and the efficient frontier in another post. I’m very risk loving with my rollover IRA because I don’t need the money and I can’t touch the money without penalty until age 59.5. My pre-tax retirement portfolios have always been seen as funny money where the government could easily taketh away.

3) Retail prices. Your 401(k) plan will probably have institutional prices for their mutual fund offerings which are lower than retail prices. Think of lower pricing like buying at Costco or group health insurance. Retail investors don’t have bulk pricing power and therefore will pay more for the same fund in an IRA most of the time. The PIMCO Total Bond fund has an expense ratio of 0.46% for institutional investors and a 1.6% expense ratio for class C retail investors. Hence, if you like your mutual fund selections in your 401(k) then it doesn’t make sense to leave your 401(k) and buy the same mutual funds in your IRA.

4) Have to make an effort. Rolling over your 401(k) into an IRA takes action. Most people I know are either scared of investing or too lazy to stay on top of their investments. I didn’t roll over my 401(k) for one full year because I was happy with just making macro bets and didn’t want to bother trying to figure out how to rollover the portfolio.

Luckily it’s the year 2017 and the internet has made things as easy as cake. I logged onto my Fidelity account and clicked the “rollover” option, answered some questions and viola! My rollover IRA was available the very next day. I think all of the major financial firms that have 401(k) plans also have rollover IRA options. It’s much easier than you think. Just give them a call or click around on the homepage.

ROLLOVER THAT 401(k) IF YOU CAN

I recommend everybody who has lost a job or who is transitioning to a new job to rollover their 401(k) into an IRA due to an increased selection of investments, lower expenses, and more flexibility. Just be honest with yourself in understanding your own risk tolerance and gambling tendencies. Make no mistake that the stock market is the world’s largest casino. There’s a reason why vernacular such as “making a bet on XYZ stock” exists. Nobody knows the future, but we can all make educated investment decisions.

Please continue to do your best and max out your 401(k)s and IRAs in the meantime. The contribution limit for your 401(k) and IRA for 2017 is $18,000 and $5,500, respectively. You will surprise yourself by how quickly your contributions add up over time!

WEALTH BUILDING RECOMMENDATION:

Stay On Top Of Your Money: If you want to build wealth, you need to know where your money is going. Sign up for Personal Capital, a free online wealth management tool which keeps track of your income and expenses, tracks your net worth, and provides portfolio analysis tools to see if you are properly positioned and paying too much in fees. I personally am saving over $1,700 in annual portfolio fees I had no idea I was paying after running my 401(k) through their Fee Analyzer tool! My rollover IRA now costs under $450 in fees annual based on a ~$450,000 portfolio.

Another excellent tool they just rolled out in 2016 is their Retirement Planning Calculator. Unlike other retirement calculators, Personal Capital’s takes your real data from your linked accounts and runs thousands of algorithms through a Monte Carlo Simulation to produce the most realistic future financial scenarios possible. You can recalculate with multiple variables. I definitely recommend running your current finances through various scenarios to see how you’re doing. Everything is free.

Sample retirement planning calculator results

About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.

Author Bio: Sam started Financial Samurai in 2009 to help people achieve financial freedom sooner, rather than later. He spent 13 years working in investment banking, earned his MBA from UC Berkeley, and retired at age 34 in San Francisco.

Sam’s favorite free financial tool he’s been using since 2012 to manage his net worth is Personal Capital. Every month, Sam runs his investments through their free Retirement Planner and Investment Checkup tool to make sure he stays financially free, forever. It’s free and easy to use.

For investing opportunities in 2019, Sam is most interested in investing in the heartland of America through real estate crowdfunding. Property valuations are much cheaper and net rental yields are much higher. There is a demographic trend towards moving away from higher cost areas of the country to lower cost areas thanks to technology.

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Comments

Every 401k I have had was severely restricted in what you could invest in, usually a variety of funds and even that was fairly limited. An IRA gives you a lot more flexibility in terms of investment options. I’ve rolled over every 401 I’ve had to an IRA.

Great article! A few years ago I rolled over an old 401K into my then employer 401K. Both were at fidelity, but they couldn’t transfer the money directly. They had to sell everything, mail me the check and then I had to mail the check back to Fidelity to my new 401K account. That was ridiculous.

Now I have an old 401K again ( swtiched jobs), and am considering going the IRA route. I am jsut not certain with which company to go. Is Fidelity IRA rollover seemless?

The two disadvantages with IRA’s over 401K include:

1) If someone were to sue you, they can tap your IRA but they cannot tap the 401L
2) You can withdraw money penalty free from a 401 (K) when you get 55, if you have retired. With IRA, you have to wait till 59 and 1/2 years. However, you can do the 72 (t).

Stock picking is a tough game in today’s market. That’s why actively managed funds typically outperform their passive peers…
Rollovers into roths are fantastic when you tax rate will be low for the year. We may rollover my wife’s this year.

*underperform
As a side note, why can’t you invest in ETF’s in a 401k? I’ve always wondered that, since they are the preferred investment vehicle of most savvy investors. I invest almost exclusively in low cost Vanguard ETF’s, with the only exception being a small amount of Berkshire Hathaway.

ETFs are available in smaller retirement platforms currently (some TPAs and RIAs have been successful with ETF-only 401ks as long as plan assets are small). The problem comes with intraday recordkeeping and present reporting requirements for plans. The legal aspect is still catching up. Also, firms worry that adding ETFs into a retirement plan would promote day-trading (even though several academic studies have shown there is no strong proof of this). There also arises an issue with the way settlement occurs. Mutual funds post prices EOD and settle T+1, whereas ETFs get Price @ mkt and settle T+3, like a stock does. With increased focus on 401k fee disclosure, increases in recordkeeping cost due to the varying changes in account composition would reflect poorly. It may gain some ground in the future. However, at this point, most firms are reaffirming index mutual funds would be a better (and cheaper) alternative for 401k plans (hopefully your index funds are institutional share classes.)

You’re forgetting another benefit of rolling over into an IRA. You can start taking penalty free 72t early distributions for an additional stream of cash flow. You’re young enough that the rate at which you’re allowed/required to take these distributions would be well below the expected gains for the year, so your portfolio would still continue to grow, albeit at slightly slower rates.

You’d also be eligible to roll parts over to Roth IRAs in years that you have very small taxable income, then pay the low taxes, and let the growth accumulate tax free. After 5 years, the principle that was rolled over into that new Roth IRA will be eligible for withdrawal penalty-free.

These are some of the scenarios we’re thinking about when planning for an early exit from the workforce. =)

Gold star! Thanks for the reminder. Would love to hear your rational regarding a ROTH vs a traditional since most folks won’t make more in retirement and therefore pay a higher tax bracket than while working.

Let’s use me for example. I retired at 35 and have a rollover IRA that is worth roughly $400,000. I’m moving from the top income tax bracket of 39.6% to the 25% tax bracket thank goodness. What I can do is comfortably withdraw $10,000 a year in principal for 25 years until I’m 60 since some of the $400,000 is due to gains. Taking out $250,000 at a 25% tax bracket vs. a 39.6% tax bracket is roughly $37,000 less in taxes I’ve got to pay. It would be nice to make more than I made while I was working now, but I’m not working and my financial nut isn’t big enough to compete.

The 72(t) provision allows/requires the annual distribution to equal the total IRA Rollover amount, divided by one’s life expectancy minus current age. i.e. if FS life expectancy is 82, less 37, remaining years equal 45. $400,000 divided by 45 equal $8,889/year. Excess withdrawals are then penalized at 10% Federal, and a special(!) CA penalty of 2.5%, in addition to regular incomes tax.

The 72(t) is actually part of my strategy going forward. There is a detailed explanation in Ray Lucia’s “Buckets of Money” book, but the bottom line is if you can minimize Earned Income and have it taxed at a lower rate (i.e. $25,000 in 72(t) annual withdrawal, and $50,000 in a CD maturing each year from a ladder), you can pay tax on $25,000 plus whatever interest/dividend income you realize. This is going to put me in the 15% bracket, maybe just over. There is a lot more to it in the book. An interesting strategy for the right person(s).

Roth IRAs are fine for new money that was going into savings anyway. You would really have do some backflips to make an IRA to Roth IRA conversion make sense. The only scenario I can think of is if you are unemployed, have run out of unemployment benefits, have enough savings to live on for five years, and expect to be unemployed after five years but are still too young for a pension or Social Security.

There are odd variances not found in these tables, however. For instance, U.S. Mormons are predominately white, and live four years longer than the average white in the U.S. They don’t smoke, drink, stay out late, or contract STDs or have any other kind of fun. My own theory is that is just SEEMS like they live four years longer, but that theory is a ‘work in progress’ and I wouldn’t go to the IRS with it. If there is a family history of a disease, or you already have had a heart attack, cancer, etc., that also changes your life expectancy.

Like the ‘Charitable Contributions’ (thanks for the link, btw, good info!), as long as you can back it up you will be OK, but the tables noted above will keep you off the IRS radar. Good luck, it is a great deal for the right situation!

A constant battle for me is dealing with the investment limitations, much higher fees, and rebalancing restrictions in my 401(k). When the cheapest fund in my 401(k) has a 70 basis point expense ratio, it doesn’t make for a pretty set of options.

I roll over my 401k over into my IRA every single time I leave a company specifically for the reasons you have outlined. I am severely limited in my 401k options and am subjected to fees that I do not agree with. Now I am able to trade and invest as I see fit, most importantly I can sell cash covered puts in my retirement account without having mountains of tax paperwork!

I would be interested in hearing your stock picking theory. I want to invest some of my side-gig profits in a speculation portfolio, but I am having a hard time coming up with a strategy. I’m just not sure how to determine what and when to buy/sell. You suggest 3-5 stocks, which is right up my alley for the speculation side of my portfolio.

Perhaps I will elaborate on my thoughts on Apple, Baidu, and Sina in a future post, but I don’t want this site to become a stock picking investment site where people trade their money off my ideas. I am comfortable blowing myself up, not others! :)

I am not an expert in trading and terminologies. However, I have my 401k far more than a year at fidelity. They have a concept of brokerage link account. You can transfer your current 401k amount(by selling current holdings) to brokerage link and also you can have your future contributions going direct to brokerage link account. The advantage is brokerage link account is like any other trading account and you can invest in targeted stocks you want. At the end of day it is still treated as a 401k account.
Correct me if wrong

Milan,
I also have a Fidelity 401k with BrokerageLink, and you are correct. That addresses many of Sam’s downsides. The only bad part is that you are still charged the plan’s management fee on BrokerageLink holdings. So I have to pay .11% on my own portfolio! But, I would rather have it than not.

Hi Matt,
Sometime back i called up fidelity and confirmed what were the management fees and they said my plan had no management fees or any other types of fees associated with it. Not sure if have some privileged account.

These are really good benefits to know about. I currently have both a 401k and a small Roth IRA right now. I don’t really trade in my IRA anymore though since I stopped contributing to it and the transaction charges to trade are expensive. I hadn’t heard of the 72t distribution rule before either. That’s pretty sweet. Right now I’m just focusing on my 401k but if I retire early down the road I’ll look into converting it to a rollover ira for the flexibility.

I know you like to hate on Roth’s. But I think there’s some weird rule where you can roll your 401k into a Roth IRA and not pay the 10% penalty. The downside being you’re going to get hit with a MASSIVE tax bill that year if you move the whole account, the upside being you can take that money from the Roth whenever you want since it’s now post tax money and you could get WAY more into a tax free account than you otherwise would be able to.

I don’t know if I have the exact details right but I think if you had a $100k 401k it means you could get $100k into a Roth account(assuming you had enough cash on hand to pay your tax bill). If I’ve got that right then technically you’d now have more money in a tax free account than you previously had with your 401(k) since that $100k is now post tax and not pretax. If you’re rich enough to take the hit, you end up with way more in a tax free account than you would otherwise be able to accomplish.

This is how rich people who’ve made way more than the Roth contribution limits manage to get millions into those accounts. Sell a business in which you’ve loaded up your 401k(business + individual contributions maxed), take up residence in a tax free state, wait till you’re in a decent tax situation and then pile that 401k into a Roth. Not ideal for everybody but I don’t think you have to convert your whole account at once. Might be worth trickling smaller chunks out while you’re unemployed.

Well, what about trying to use some of these guidelines from the IRS?
* You were unemployed and paid for health insurance premiums (form 5329 line 2, exceptions code 09),
* You paid for college expenses for yourself or a dependent,
* You bought a house,
* You paid for medical expenses exceeding 7.5% of your adjusted gross income

I’d imagine that if you staggered the transfer of monies over a period of a few years to a Roth, you could have saved more in taxes.
Keep in mind that I’m not a tax attorney, or CPA, etc. I just play one in my own household. :-)

My thinking was you can effectively get a larger amount of money into tax-free accounts by doing a Roth conversion than you could otherwise. Using easy numbers, say you pay 40% in total taxes and have $10k pre-tax dollars to invest. You can put $10k in the 401k or $6k in the Roth and at the end of the day if you were to pay a 40% tax rate at retirement and made the exact same returns the 401k is equal to the Roth.

In this scenario $6k Roth dollars is equal to $10,000 401k dollars given the same tax rate of 40%. There’s no difference between the two amounts.

So extending that logic if you maxed out your 401k at $18,000 and converted it to a Roth and now have $18,000 in your Roth, did you just extend the contribution caps? $6k Roth is equal to $10k 401k. So $18,000 Roth would be equal to $30k in your 401k? Seriously I could be overlooking simple math but that’s what I was thinking.

@Shaun, your math is correct on the $10K/$6K, but your premise that all dollars are taxed at 40% isn’t.

You can Google the Federal tax brackets, and see how you are taxed at lower rates right up until you make $400,001 a year. The blended rate for making $400,000 is 29%. You can earn up to $87,850 and pay a blended rate of 20%.

So if you make that conversion in a year in which you make over $400,001 and pay 39.6% for every dollar thereafter, you will want to delay paying that maximum rate if you are going to pull out less than $400,000 a year in your retirement years.

For fun, drawing down $400,000 a year on a 7% return for 28 year requires a $10,000,000 nut. Hope this is useful to you.

JC, just on your last line argument. Why do you think so many folks believe they will have such HUGE financial nuts to generate more income in retirement than while working? It’s possible, but the chances are low, so why contribute to a ROTH and pay up front?

@JayCeezy. 40% was just a number I picked as an example to make my point. Obviously your tax rate now and at retirement probably won’t both end up at 40%.

Most people end up paying federal, state and payroll taxes on the income not just federal. This could easily reach ~40% of your income if you make over 35k a year and live in a high tax state (25% fed bracket. 7% state, 7% payroll). Since the taxes get taken from/added to the top of your MAGI using a blended rate to calculate the taxes you’re paying on that specific amount wouldn’t be right.

@Shaun, I believe you may have missed what JayCeezy was saying about the 40% rate not being valid in retirement, since every dollar that you withdraw from your retirement savings isn’t taxed at your upper rate.
The reason he mentioned the “blended rate of 29%” and “blended rate of 20%” is because of the tiered tax system.
So effectively if you were able to get $87,850/yr from a Roth, your equivalent in a taxable 401k would have to be 20% more … or $105,420 withdrawals before taxes.

@FS, you raise a great question and I wonder what your theory is. I have noticed this phenomenon, too. One young man, newly entered the work force 8 years ago, told me of his plans to have an eight-figure nut by age 40. Well, he is now 10 years away and still working on that first six-figure nut. Maybe when you are young, everything is ‘possibility’? Any thoughts you have on this would be of interest to me.

Many of my contemporaries have been working for decades, and are still “waiting for their ship to come in.” They are not in line for inheritances, and while they have good jobs and (sometimes) a working spouse, there is nothing in their financial habits that indicates anything more than a “belief” as you aptly describe it. Maybe this ties into previous posts where you reference a cultural “belief” that we are all “special”? Side note, I have recently witnessed a couple of colleagues in their 60s, advanced degrees and significant salaries, announce their intention to retire imminently; they both came back from HR, mortified that they didn’t have enough income to even meet their basic outgo. Sad, but I also have to wonder on your question. btw, still working my details and will work up my timeline and how your book was really helpful in making a positive outcome for me. Thanks again for “How To Engineer Your Layoff”, a very practical and readable book at a good value.

@Shaun, I confess to being baffled by your response. Just curious, what is the specific reason you think FS “hates” on Roth IRAs?

@Rich, I cannot tell if you are joking or not, so will take your post at face value. The crazy part (to me) is that these guys have worked for decades, without an exit plan. One of them “could have sworn” that he signed up “for the retirement plan.” But he did not, the money that would have gone into a plan was paid, taxed and spent. So here he is, a smart guy with a great family and nice house, yet no idea what it would take for him to sustain his lifestyle once work ends.

If you were making a joke, it was very funny; hard to feel bad for somebody with so much going for them, and they just dropped the ball. Either way, appreciate your thoughts, thanks.

A disadvantage of rolling into an IRA is from a liability perspective 401k is protected from creditors and lawsuits. If you ever declare bankruptcy all of your balance is protected in a 401k, but once rolled into an IRA you lose that protection.

Actually, an IRA account is protected from creditors for up to $1,000,000. Any amount of money rolled into an IRA from a 401K has unlimited protection. The IRS can take it all from either type of account for unpaid taxes.

IRA always offers flexibility when it comes to investment. If you think that will work for you best, then rollover. Good for you. Still, I’d recommend thorough research and great considerations before you do any. I always think it still depend on an individual’s current financial situation.

Wow, you changed your mind about the IRA! I thought you were going to let it roll at the 401k. For me it was an easy decision because there were too many restrictions at my old 401k plan. I’m really glad I roll over because the market did so well since I rolled over. There is no way I could have match my current return if I left it at my old 401k.
Where do you stash the cash while you are waiting for a pull back?

When Apple, Baidu, and Sina careened to 52 week lows, and when I no longer felt comfortable just buying mutual funds for beta exposure, I decided I just had to rollover my 401k to buy stocks I believe are going to rebound, eventually.

To stash cash in IRA, just sell. It’s in “Fidelity Cash Reserves” for me, and Cash Reserves X for other IRA accounts. Or, my favorite easy bond fund is VUSUX when the 10-year bond yield goes over 2%.

I much prefer the IRA over my 401k simply due to the wider investment choices. As you’ve mentioned, in an IRA you can construct a portfolio of ETFs that will have miniscule fees compared to the funds in most 401k’s. There’s no good reason to hand over more money than you have to, be it to the government or some fund manager.

Great breakdown Sam! I would almost always recommend rolling the 401k, unless the plan has some really good funds available as well as being lower cost. The other thing to watch out for is that some employers will not allow you to participate in the full plan and will limit your options once you leave the firm. When I dealt with retail investors on a daily basis the main issue was that many would have multiple 401k’s out there and have no idea what was in them or the fees they were opening themselves up to. If they can put that all into one account, theoretically, it should be easier to manage. Though, we all know life does not always go as theory would have it though. ;)

Related to the more selection feature of IRA’s… going with a self-directed IRA can be a great way to use your old 401k -> IRA money to invest in real estate, trust deeds, bridge loans, small businesses, and other non-traditional (and less liquid) assets.

Yes but it will likely need to be with a different provider than you have now. There are a handful of self-directed IRA companies (Equity Trust, Accuplan, Broad Financial, …). Go here for a good high-level overview: https://en.wikipedia.org/wiki/Self-Directed_IRA. You can use them for a huge array of less-liquid investments (real estate, hard money lending, P2P, precious metals, direct businesses purchases/investments, etc…). Best bet is to keep your existing IRA and then move money to the self-directed provider when needed for an investment to avoid excess fees. It helps if the $$ amounts are higher to justify their fees.

The main watch out is for the IRS rules on self-dealing and permitted investment types (e.g., not wine, coins, …). I have heard of people who have split units to get around the self-dealing rule. She bought a three unit condo… one flloor with her own taxable money to live in, and the others through a LLC she setup and funded with money from her self-directed IRA to rent and depreciate.

You left out one obscure reason not to rollover. These is a difference in creditor protection. 401k plans are ERISA plans and are protected from creditors, no matter what the size of the account. Rollovers are NOT ERISA plans and while they have certain protections in bankruptcy, they are protected from creditors in non-bankruptcy situations, based on state law. Details in my post:

I pray to goodness nobody here, or myself don’t leverage up so much that we have to go into bankruptcy. If I feel that I will someday go bankrupt, I will enact rule 72(t) and withdraw everything and buy bottles of Moet in Vegas and live it up!

For many rolling over a 401(k) to a traditional IRA might be attractive, but if you are under 59-1/2, the only way to do this without an early distribution penalty is to use the “substantially equal periodic payments” exception. When I retired at 55 last year, I elected to leave my money in my employer’s plan as I did not wish to be restricted to the same distribution amount for the next five years. With a 401(k) plan, you are not bound by this rule. My retirement is my sole source of income now and had I rolled it over to an IRA and not used the “substantially equal periodic payments” rule, the tax penalty over the next 5 years would have been astronomical.

I think what is even better than a traditional IRA is rolling over to a Fixed Index Annuity. I mean guarantees and protection is important then a Fixed Index Annuity is the best way to get the highest value for your retirement. Many people ask, “why rollover my 401k?” but they don’t really understand where to put their nest egg for retirement. I found this page helpful: whyrollovermy401k.com

are tax rates going up next year (2014)? If this is true true , would I be better off w/401k rollover to my roth . I am retired so I can not contribute to my roth anymore(no earned income) so I can get to my $$ and pay my taxes now at the lower rate than what it will be if I wait until 2014 and then continue to grow tax free. ? the value is around 100k and our current income of ss and retirement is around 40k. Is my thinking flawed ??

I have been reading this site for over a year now and thought it was time to jump in. First off thanks to our host FS. What a great place to get a polling from people who are actively involved with the concept of 401k, IRA income after working FOR someone. Full disclosure I am almost 59 and have both a 420k IRA and a 480k 401k. My dear wife slightly older has a similar set up. While that puts us on the lower end of FS recommendations for our age group it is good to know that! By definition I have a older perspective but I think it is worth mentioning that since I have been involved with the 401k since inception not enough employees understood that significant changes were comming IE the demise of the defined benefit or company pension. Having a 401k requires thinking like an investor and where do you learn that? Sadly not in school even post graduate degree programs only teach skills that help you make other people money. Perhaps it is a little on the oldish reading list but has anyone else read the Rich Dad Poor Dad books?

I made a (big?) mistake when I rolled my 401k over. Instead of getting it all in one lump sum, my old company gave me what I had invested in their stock as a common stock distribution!

I did not mean to do this. In fact, when I called the lady said it’s because I didn’t check a certain box I needed too in able to have gotten it all in one lump “cash” sum.

I’m only 31 and obviously understand the before 55/59.5 issue along with the 10% penalty. At this point I’m fairly certain I don’t have any other recourse than to treat this is an early distribution.

The value of the stock is roughly $40,000 and is also roughly 40% of my total 401k. Can you give me any advice to minimize the tax/penalty potential? Should I keep the stock for a certain period of time? Should I sell it?

I recently was laid off and now have run out of my severance benefits. I have enrolled in school full-time and am working as a student worker making under $10,000/year, which is a huge decrease in my annual income.

I have a 403b account with just under $17,000 in it. I am planning on rolling it over into a rollover IRA. I also need to take a cash withdrawal of about $9,000 to help with my higher-education expenses for the year. I’ve been told, for higher education purposes you can avoid paying the 10% penalty.

What are my best options to save on taxes on the money I am pulling out and make the most of the $8,000 that I am leaving behind in my roll-over IRA?

Also, as my income has reduced drastically since the end of June 2015, is it better for me to rollover into a Traditional or Roth IRA?

I’m going to be leaving my current job in the very near future and I’m considering rolling over my 401k into an individual IRA. Currently I have a standard account with Td ameritrade that I’ve been putting money into and successfully doing swing trades with for years now. Are there rules in place that would not allow me to roll over my 401k into this type account?

I have 1.2 million in a vanguard administer 401k, among 6 different funds. I retired in 2016 at 64 and don’t really plan to withdrawal funds until age 70. Wanting to understand the process I called to execute a $500 withdraw. What I found was I couldn’t identify which fun I wanted the funds to come from. And they have to do a wire transfer to my bank checking account vs an easy transfer to my Vanguard Money Market account. The plan distributes the withdraw among all 6 funds. I don’t like that it limits me to use funds that are up vs ones that may be down in the market. I was keeping the 401K because I like the ease of rebalancing but now I am thinking about rolling the 401K to individual IRA’s and make withdraws easier and targeted.

[…] after-tax investments to be more low-risk through structured notes, and my pre-tax investments in my rollover IRA, SEP IRA, and Solo 401k to be more high risk. Given my pre-tax investments can’t be touched […]

[…] year because I have a defensive portfolio of structured notes, muni bonds, and index funds. My rollover IRA was quite volatile as I kept on punting in and out of stocks. Don’t do that. Just buy some index funds based on […]

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